97. Institutions should develop scenarios of severe macroeconomic and financial distress, varying …

Institutions should develop scenarios of severe macroeconomic and financial distress, varying in their severity (including system-wide events, legal entity-specific stress and group-wide stress), to be used in recovery plans under Article 5(6) of the Bank Recovery and Resolution Directive (BRRD) and EBA/GL/2014/06, and use specific reverse stress testing to develop ‘near-default’ scenarios (institution close to failure but no further) and as an input to inform and test the efficiency and effectiveness of their recovery actions and their recovery planning, and analyse sensitivities around corresponding assumptions. Such ‘near-default’ scenarios should identify and describe the point that would lead an institution’s or a group’s business model to become non-viable unless the recovery actions were successfully implemented. The scenarios should allow the estimation of results and the suitability of all the available recovery options. The terminology used in the description of recovery scenarios should help to determine which recovery options were tested under particular stress scenarios. The description should have a sufficient level of detail, through both a set of quantitative assumptions and a qualitative narrative, in order to determine whether or not the scenario is relevant for the institution and how severe it is. The events should be described in a logical sequence and the assumptions underlying the main drivers (e.g. net income, risk-weighted assets (RWAs), capital) should be laid down very clearly. The scenarios should also take into account a possible estimation of the cross-effects of executing different recovery plan options in the same stress scenario. The scenarios should also allow an understanding of how the events unfold by providing an appropriate timeline that makes it clear at which point in time certain actions will be developed (with implications for their credibility and feasibility). The purpose of this exercise is to test the effectiveness of the institution’s recovery options in restoring financial strength and viability when the institution comes under such severe stress.

1. Overview

1.1 References

1.2 Identified Requirements

1.3 Related Standards

2. Identified Requirements

3. Related Standards

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